Grupeer’s Guide to Payment Systems

What do we know about the Payment Service Providers & Payment Institutions?

The technological advancement has given a way to the development of highly technological companies, that aims to challenge the old banking system- the Fintechs. Just think about that- the traditional banking system has stayed relatively unchanged throughout many hundreds of years. Right now, it is a very exciting time to be alive and especially work in the Fintech sector. Grupeer platform too is the product of technological progress. With p2p platforms like Grupeer, it is possible to connect borrowers and lenders directly, without the need for an intermediary, like banks. We believe that “secret sauce” of strengthening the Fintech sector is a collaboration between similar highly innovative companies. One of such efforts at Grupeer was the switch from a traditional bank account to the Payment Service provider. We decided to make some research about this trending solution and share it with our readers.

What is a Payment System?

Thy Payment System is a way to transfer money electronically. The payment system gives the user a bank account, that allows to pay for online goods or services, as well as to transfer money to a different bank account. Electronic payment systems gained increased popularity over the last decade thanks to the development of technology and raise of Fintech. Now, payment providers can be called a separate industry, just like the banking industry. According to research by BNP Paribas global non-cash transaction volume has compound annual growth rate around 10% from 2012 to 2016. The growth is projected to accelerate to CAGR 12.7% globally, with emerging markets at 21.6%.

The customer of a payment system, in effect, has purchased for real cash another means of payment. The debit card requires a bank account, while credit card requires contract agreement, however, the client of the payment system can use electronic money that he or she has purchased.

Why they are needed?

Demand generates supply. The globalization requires fast, borderless payments and preferably cheap. The disruptive force of digital innovation allows challenging the old-school conservative banking system. The research conducted by international firms shows that the SMEs’s biggest challenges for international expansion besides the need for cross-border payments are the competitive FX rate. The new generation payment system providers have entered the market to provide solutions to these pains. The payment systems offer cheap money transfers to anywhere in the world and sometimes even the spot exchange rate. In Europe, the Payment Services has helped to develop Single Euro Payments Area (SEPA), increased competition and expanded freedom of choice for European customers.

Another benefit of a payment system solution is inclusion- people or companies who couldn’t open a bank account due to their restrictive procedures now can open an account and benefit from cashless payments and transfers. Additionally, payment systems provide improved customer experience, like rewards and loyalty programs, smoother checkout, personalization options.

What are the primary functionalities offered by a Payment Service?

  • Possibility to deposit and withdraw cash, facilitate transfers between accounts and all other services required for maintaining a payment account
  • Ability to perform payment transactions such as direct debits, credit transfers, and card payments
  • Issuing debit or credit cards (means to facilitate the payment)
  • Ability to process incoming transactions
  • Money transfers
  • Provide account information on request
  • Ability to initiate a payment

Most common payment licenses in the European Union

There are two types of licenses that allow operating in the European Union as a payment system provider under the Payment services directive (the directive is called PSD2). All other domestic financial supervisors have to comply with this directive and make sure that the guidelines are followed.

  1. PI (Payment Institution) such license allows companies to provide financial and intermediary services, such as opening accounts for private persons and businesses; allow transferring money between the accounts and also withdraw funds. Besides that, PI can create its own payment instruments and attract it from third parties. To get the license the company needs to be in the same jurisdiction as the authority issuing such license as well as bank account there with minimal capital of €125,000.

 

  1. EMI (Electronic Money Institution), sometimes referred to as a e-Wallet. It has all the features of the PI. However, the EMI license allows the company to issue electronic money, which is a digital form of cash. The electronic money can be used outside the EMI and also converted to any other currency as well as opening saving deposits. EMI license makes the company very similar to a bank, the only difference is that it can’t issue loans. Additionally, EMI is able to open sub-accounts for customers’ within EMI’s own bank account, thus creating an electronic wallet. This license is useful for companies, who put electronic wallets on the webpages of online stores or for users to be able to withdraw funds. The Electronic Money Institution has to open a bank account in the same jurisdiction that issues the EMI license and deposit there Eur 350,000 for the whole duration of operating as an EMI.

Once payment services were exclusive to the banking sector. The development of payment systems providers has brought competition to the sector and brought innovation. However, it possesses a lot of challenges to the regulators, as with any new industry. Let’s enjoy the progress together!

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